Malaysia Stocks Seen Extending Drop on Election: Southeast Asia

Malaysian stocks are poised to extend losses after completing their worst month since September 2011 on concern the nation’s ruling coalition may lose seats in elections, according to UBS AG and Goldman Sachs Group Inc.

The benchmark FTSE Bursa Malaysia KLCI Index retreated 3.7 percent last month, after reaching a peak on Nov. 1. The gauge slumped to a five-month low on Nov. 27, dragging valuations to 14.7 times estimated profit, data compiled by Bloomberg show. Even after the declines, the KLCI index is trading at a 28 percent premium to the MSCI Emerging Markets Index.

Prime Minister Najib Razak said last weekend elections may come soon as his ruling Barisan Nasional, or National Front, alliance attempts to regain a two-thirds parliamentary majority it lost in 2008. The KLCI slumped 39 percent that year, the most since 1997, on concern a stronger opposition would stymie government investment plans. UBS’s Kelvin Tay recommends investors avoid Malaysian equities for now.

“The elections are going to be an overhang on the market,” Tay, the Singapore-based chief investment officer for the southern Asia-Pacific region at UBS’s wealth management unit, said in a Nov. 23 interview. “Where Malaysia is concerned, in the last three-to-four elections, whenever Barisan Nasional loses more seats, the foreign direct investment tends to drop. That’s what the market is actually fearful of.”

Favorite Market

The KLCI index rose 0.4 percent at the close in Kuala Lumpur, with trading volume 17 percent lower than the 30-day average, data compiled by Bloomberg show. The MSCI Asia Pacific Index gained 0.4 percent.

Tay’s favorite market is China, where the official target for economic growth this year is 7.5 percent, compared with the 5 percent Malaysia’s government is estimating. Goldman Sachs downgraded Malaysian stocks to underweight in a Nov. 29 report, citing a preference for Indian equities.

“The Malaysian equity market has corrected in recent weeks, in part due to potential political uncertainty surrounding upcoming elections and investors rotating out of the year’s earlier winners into other markets,” Goldman Sachs analysts led by Timothy Moe wrote in the report.

Najib’s National Front is seeking to extend its 55 years in power and improve on 2008, when it won elections by the narrowest margin since independence in 1957. The alliance holds 137 parliamentary seats out of 222, according to the Malaysian parliament website. The opposition has 76, while independent lawmakers hold the remainder.

Election Target

The National Front has revised its election target and is now aiming to regain its two-thirds majority, the Star newspaper reported on Dec. 2, citing Najib. The prime minister said in March winning a clear majority would be “challenging.” Former Prime Minister Mahathir Mohamad said Sept. 20 that while the alliance would “most likely” win, the government would achieve weaker results than in 2008, the Malaysia Chronicle reported.

The KLCI Index’s slump in 2008 was the worst annual performance since the 1997 financial crisis. The head of the opposition-led government in Selangor state said after winning power from the National Front in 2008 that he would review a contract awarded to Puncak Niaga Holdings Bhd. The stock sank 6.4 percent to a 16-month low on March 18 that year, after news on the contract review was reported by the Star newspaper.

Foreign direct investment into Malaysia slid 14 percent to $7.4 billion in 2008, data from the World Bank show, after the election results and as the collapse of Lehman Brothers Holdings Inc. triggered a global financial crisis.

Underweight Malaysia

“We have been underweight Malaysia as we are not finding growth stocks at reasonable prices,” Yuko Namaki, a Tokyo-based fund manager who helps manage $282 billion in assets at Nomura Asset Management Co., wrote in a Nov. 29 e-mail. “The government seems to be focusing on preparing for the impending general election. Investor sentiment seems poor due to the uncertainty.” She’s been selling Malaysian equities in the past six months.

David Ng, who oversees about $5.9 billion as chief investment officer of Hwang Investment Management Bhd., said on Nov. 27 he used last month’s declines to buy shares of telecommunications companies. The premium at which the Malaysian gauge’s price-earnings ratio trades over the MSCI Emerging Markets Index dropped that day to the lowest level since January 2011.

The KLCI Index climbed earlier this year amid speculation the government infrastructure spending pledged by Najib in 2010 will shelter the nation from Europe’s debt crisis and a global economic slowdown. Thirty-day historical volatility on the gauge has averaged 7.3 this year, less than the MSCI AC World Index’s 13.1, data compiled by Bloomberg show. KLCI Index stocks have an average dividend yield of 3.6 percent, compared with the MSCI World’s 2.8 percent, the data show.

Less Risky

Demand for less risky assets is diminishing as confidence in global growth rises. The world economy is in its best shape in 18 months as the U.S. looks likely to avoid the tax increases and spending cuts known as the fiscal cliff, according to the latest Bloomberg Global Poll of investors.

KLCI Index companies posted average third-quarter profit growth of 4.9 percent, lagging behind the MSCI Emerging Markets Index’s 13 percent, data compiled by Bloomberg show. Earnings of KLCI Index companies are predicted to increase 3.1 percent in the next 12 months, compared with the MSCI gauge’s 19 percent, according to analyst estimates compiled by Bloomberg.

“I don’t like Malaysian stocks right now,” said UBS’s Tay. “How do I justify telling you to buy Malaysian equities if there’s no growth, the market doesn’t look fantastic and there’s no catalyst? It doesn’t make sense.”

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